Amid speculation that government may impose tax on commodity derivatives in the budget 2013-14, industry bodies have demanded exemption to such derivatives from transaction tax, saying any levy would distort the nascent market.

Commodity bourses and brokerage firms are speculating that government may reopen the old proposal made in the 2008-09 Budget to levy 0.017 per cent tax on commodity derivatives trade (Rs 17 on Rs 1 lakh worth transaction).

In separate representations to Finance Minister P Chidambram, three industry bodies, CPAI, CII and Asshocam, have demanded exemption to commodity derivatives from any transaction tax.

"It is learnt that some of interest groups in the stock markets are attempting to influence public opinion to remove lower some taxes in stock transactions citing that similar taxes are not levied in commodities derivatives. ... unlike the stock market, the raison detre of commodity derivatives is risk management," Assocham Secretary General D S Rawat said in a representation.

Commodity derivatives are hedging instruments and fundamentally different from equities. "Transaction tax can only increase the cost of hedging and drive out genuine hedgers," he said.

Assocham also said the commodity market has already been heavily taxed in the form of mandi tax, VAT, excise and customs duties both at the central and state government level, most of which do not exist for securities market. "In the light of above, we request you to refrain from imposing any transaction tax on commodity derivatives," it demanded.

Expressing similar views, Commodity Participants Association of India (CPAI) said: "All three hedging instrument – currency, commodity and interest rate derivatives – should not have transaction taxes as this would make markets narrow, shallow and illiquid, hurting price discovery as well as risk management,"

Any increase in transaction tax will lead to shifting of volumes to either overseas exchanges or to the domestic illegal market called 'dabba' trading market, it said.

Seeking commodities to be exempted from any transaction tax, industry chamber CII argued that a tax on commodity trade will dissuade those who desire to hedge their risks. "This in turn, would reduce market liquidity through reducing volumes and increasing bi-ask spreads."

"Some of the studies have shown that imposition of CTT may not lead to a significant increase in revenue for the government," CII added.

The CTT of 0.017 per cent on commodity derivatives was announced in the 2008-09 Budget, but was not operationalised.